Carnival Corp Is Amassing Cash to Survive With No Cruises

CCL stock reflects the new reality — no cash flow but lots of expenses until at least late 2020

Carnival (NYSE:CCL), the largest leisure travel company, is amassing cash to survive with no operations bringing in cash flow for the foreseeable future. CCL stock reflects this new reality.

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It is down to $8.49 per share from its 52-week peak of over $56 per share. The stock is highly speculative at this price. There is no margin of safety and limited visibility going forward.

Moreover, the company faces large cash drain challenges, even despite the capital that was recently raised.

The Cash Drain Will Be Huge

The cash drain at Carnival will be massive. On April 3, CCL issued its latest quarterly numbers ending Feb. 28. It shows that besides having lost $780 million during the quarter, its operating expenses are huge.

For example, commission, onboard, payroll, fuel, food, and other costs are $3.5 billion per quarter. Add in another $678 million for selling and administrative costs, and the operating total is $4.3 billion per quarter.

Of course, this reflects a fully operating company. Carnival issued a Disclosure to Potential Investors that addresses the costs while in a complete cessation of activities.

For example, it said that a substantial majority of its fleet will be in prolonged ship layup. This will cost $200-$300 million per month. That adds up to $600 million to $900 million per quarter in cash drain.

Refunds and Debt Will Accentuate the Problem Over the Next Several Quarters

In addition, the company has $4.5 billion in customer deposits as of Feb. 29, its quarter-end. Carnival also said that approximately 55% of customers wanted cash refunds instead of future cruise credits.

That means that it will cost almost $2.5 billion in refunds. On top of that, there is $1.5 billion due in current debt by November

I estimate that the cash drain this quarter ending May could be as high $3.5 to $4 billion. By August the cumulative cost will be anywhere from $5.5 to $6 billion. By Nov. 30, the end of its fiscal year, the cost will be $8 to $10 billion.

At the end of the February CCL had just $1.35 billion in cash on hand. So you can see why the company went on a debt and equity capital raising binge.

Carnival’s Equity and Debt Raise

People love a bargain. Carnival was going to raise up $1.25 billion. There were a lot of takers, so Carnival raised just $500 million at $8 per share. The stock shot up to $8.49 per share. Others wanted in on the action at this level.

And why not? CCL stock now trades at just 20% or so of its present book value. Moreover, debt investors took up to $3 billion of new first-priority senior secured notes due 2023. In addition, CLL sold $1.75 billion of senior convertible notes due 2023. These notes had a coupon of 5.75%. Altogether Carnival sold $5.25 billion in debt and equity.

Will this be enough? That is hard to say. Based on my estimates of up to $10 billion in costs by Nov. 30, with potentially no revenue, that will not be enough. Granted, that is a worst-case scenario. If the cruise line business is out of action until Nov. 30, there is likely to have been a depression in the general economy.

What Should Investors Do with CCL Stock?

This is a risky turnaround stock play. Carnival has a lot of debt, over $12 billion, plus $1.3 in operating leases. Its market value is only $8.9 billion. So the stock reflects the riskiness of the situation.

For example, what if people decide they really don’t want to travel on cruises again? The elasticity of demand in the cruise industry is high in relation to the mounting number of incidents that have happened.

As a result, it could take a long time for the company to recuperate and pay off the debt it has taken on. CCL stock reflects this real risk right now.

Unless you think that the stock is going to jump immediately, you probably will have plenty of time to jump on board when there is real fear in the stock price. That is usually the best time to move in.

In other words, wait for some kind of margin of safety to appear with this stock. Otherwise, all that you are doing is, at best, buying in at a low price-to-book-value stock. There is no guarantee or visibility on whether the company has enough resources to withstand the downturn in its business.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guidewhich you can review here.